Sonic 2004 Annual Report Download - page 30

See Note 12 for information regarding shares available for grant under the 2001 Sonic
Corp. Stock Option Plan and the 2001 Sonic Corp. Directors’ Stock Option Plan.
3. Impairment of Long-Lived Assets
As of August 31,2004 and 2003,the Company had identified certain underperforming
drive-ins whose operating results indicated that certain assets of these drive-ins might be
impaired. The buildings and improvements of these drive-ins had combined carrying
amounts of $4,747 and $2,786 respectively. During fiscal years 2004 and 2003, the
Company performed quarterly analyses of these and other drive-ins that had incurred
operating losses. As a result of these analyses,the Company determined that certain drive-
ins with then-existing carrying amounts of $1,021 and $1,214, respectively, were impaired
and wrote them down by $675 and $727, respectively, to their fair values. Management’s
estimate of undiscounted future cash flows indicates that the remaining carrying amounts
as of August 31,2004 are expected to be recovered. However, it is reasonably possible that
the estimate of cash flows may change in the near future resulting in the need to write-
down one or more of the identified assets to fair value.
4. Accounts and Notes Receivable
Accounts and notes receivable consist of the following at August 31, 2004 and 2003:
2004 2003
Royalties and other trade receivables $ 9,042 $ 8,052
Notes receivable – current 1,812 3,061
Other 7,489 6,410
18,343 17,523
Less allowance for doubtful accounts and notes receivable 256 533
$ 18,087 $ 16,990
Notes receivable – noncurrent $ 5,729 $ 10,274
Less allowance for doubtful notes receivable 270 624
$ 5,459 $ 9,650
The Company collects royalties from franchisees and provides for estimated losses for
receivables that are not likely to be collected. General allowances for uncollectible
receivables are estimated based on historical trends.
During fiscal year 2004, the Company outsourced the financing of partner notes to a
third-party financial institution, which resulted in a $6.1 million reduction in notes
receivable.
As of August 31, 2004 and 2003, notes receivable from one franchisee totaled $3,404
and $3,370 respectively. The underlying drive-in assets collateralize these notes.
5. Goodwill, Intangibles and Other Assets
The gross carrying amount of franchise agreements, franchise fees and other
intangibles subject to amortization was $2,505 and $2,399 at August 31, 2004 and 2003,
respectively. Accumulated amortization related to these intangible assets was $2,099 and
$1,962 at August 31, 2004 and 2003, respectively. The carrying amount of trademarks and
trade names not subject to amortization was $6,044 at August 31, 2004 and 2003.
Aggregate amortization expense related to intangible assets was $185 and $420 in
fiscal years 2004 and 2003, respectively. Estimated amortization expense for the next five
fiscal years beginning with fiscal year 2005 is as follows:
For the year ending August 31, 2005 $ 134
For the year ending August 31, 2006 $ 105
For the year ending August 31, 2007 $ 85
For the year ending August 31, 2008 $ 26
For the year ending August 31, 2009 $ 26
The changes in the carrying amount of goodwill for fiscal years ending August 31,
2004 and 2003 were as follows:
2004 2003
Balance as of September 1, $ 77,551 $ 46,826
Goodwill acquired during the year 11,374 28,640
Impairment losses ––
Goodwill (disposed of) acquired related to the acquisitions and
dispositions of minority interests in Partner Drive-Ins, net (929) 2,340
Goodwill disposed of related to the sale of Partner Drive-Ins (576) (255)
Balance as of August 31, $87,420 $77,551
6. Leases
Description of Leasing Arrangements
The Company’s leasing operations consist principally of leasing certain land,buildings
and equipment (including signs) and subleasing certain buildings to franchise operators.
The land and building portions of these leases are classified as operating leases and expire
over the next 15 years. The equipment portions of these leases are classified principally as
direct financing leases and expire principally over the next 10 years.These leases include
provisions for contingent rentals that may be received on the basis of a percentage of
sales in excess of stipulated amounts.Income is not recognized on contingent rentals until
sales exceed the stipulated amounts. Some leases contain escalation clauses over the lives
of the leases. Most of the leases contain one to four renewal options at the end of the
initial term for periods of five years. These options enable the Company to retain use of
properties in desirable operating areas.
Notes to Consolidated Financial Statements
August 31, 2004, 2003 and 2002 (In thousands, except share data)
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